On 7 March 2017, one year after the implementation of the Senior Managers and Certification Regime (SM&CR) which was introduced to improve accountability in the financial services sector, two further requirements have come into effect: The regulatory reference requirements; and the rolling out of the Conduct Rules to a wider range of employees.
The new rules on regulatory references will apply to certain large financial services firms (mainly UK banks, building societies and insurers). The premise is that where a firm is proposing to hire a candidate for certain senior management roles a reference must be sought from all the candidate’s employers over the preceding six-year period. This would apply even if the employee has worked outside the UK or for an unauthorised firm, in which case the hiring firm must make reasonable efforts to obtain a reference.
Under the new regime, a firm who receives a request for a reference must respond within six weeks using a mandatory template. The template requires that any information relating to the fact that the applicant was not a fit and proper person or details of any breach of the individual conduct rules is included. The reference need only disclose matters where a firm has concluded these points – and this would not cover matters where disciplinary issues have come to light but a firm has not yet reached a conclusion or where the individual has resigned prior to the completion of the investigation or disciplinary process. This will also affect the terms of any settlement agreement as employers are prohibited from entering into an agreement with the employee about the information in the regulatory reference.
Employers who are regulated will also have a duty to update regulatory references within six years of the employee leaving the business where they become aware of information which would have affected the original drafting.
The purpose of the regulatory references is to make it harder for senior staff with poor conduct records to be “recycled” between firms. It remains to be seen whether the new rules will have the desired effect of weeding out all those with poor conduct records and how employers in this sector will deal with the additional regulatory burden.
The Conduct Rules are an important component of the regime to increase the accountability of senior individuals. The rules are intended to provide a framework against which the regulators in the UK (the Prudential Regulatory Authority and the Financial Conduct Authority) can judge an individual’s actions as part of the general supervision of a firm.
From 7 March 2016, the new Conduct Rules replaced the Statements of Principle and Code of Practice for Approved Persons (APER) for senior individuals. From 7 March 2017, the Conduct Rules will also apply to certain individuals in relevant firms who were not previously covered by APER. The rules will now apply directly to nearly all staff within the relevant firm. Only those staff who are considered ancillary staff (i.e. whose role is not specific to the financial services business of the firm, for example catering staff) will not be covered. One reason behind the extension of the Conduct Rules to such a wide population of individuals was so that a common understanding of what is acceptable and unacceptable behaviours at all levels of a firm could be achieved and therefore culture change could be effected.
The rules are split into first tier, which comprises of individual conduct rules that the regulators consider relevant across all roles in which individuals are subject to the conduct rules, and second tier which apply to senior managers.
Firms must also ensure that all staff who are subject to the rules are aware of them and how they apply to their jobs. This includes delivering suitable training to provide a broad understanding of all of the rules and a deeper understanding of the practical application of the specific rules which are relevant to the employee’s individual work.
From 7 March employers will need to have in place policies and procedures relating to the conduct rules to cover a much wider section of the workforce.